The Futures Industry Association (FIA) and the International Swaps and Derivatives Association (ISDA) have jointly published a template allowing U.S. futures commission merchants (FCMs) and their customers to document their relationship with respect to cleared over-the-counter (OTC) swaps.
The addendum supplements a futures and options agreement between a U.S. FCM and its customer. It includes representations for clearing-related matters including the treatment of customer collateral, and sets forth the close-out methodology for cleared OTC swaps, the triggers for liquidation and provisions for valuing the terminated trades.
The addendum also contains provisions governing tax issues regarding cleared OTC transactions.
The Addendum is an important milestone that will enable customers in the U.S. to access central clearing of OTC derivatives transactions efficiently through the use of market standard documentation, says ISDA CEO Robert Pickel. It represents the collaborative efforts of a broad cross-section of market participants and marks another step forward in the global derivatives industry working constructively to reduce counterparty credit risk through the use of central clearing facilities.
About 30 institutions from the buy and sell side in the OTC swap markets helped draft the document.
As the financial industry moves toward central clearing for OTC derivatives transactions, there is a growing need for standard documentation such as this Addendum, says FIA President and CEO Walt Lukken. FIA and ISDA express their appreciation to the buy side and sell side firms that helped draft this document, and we look forward to further collaboration on industry initiatives such as this.
The addendum may be customized and altered by users with respect to their futures agreements. Official amendments will be considered if additional reforms are adopted in the market, ISDA and FIA say.
(CG)